It is heartbreaking when you get that call from a client or friend who has Manhattan office space and the call goes something like this:
“I absolutely love my office. But I am the only one who is using it right now? My employees do not feel comfortable coming back at the moment, but I am still paying my rent every month for a space that is not being used. Throughout this whole event, for the last 9 months, we have been paying our rent on time. We got the PPP money in the beginning, which helped for a while, but now it has all been spent, and our cash burn is just too high. I keep on hearing about friends or people in my building who have renegotiated their leases, so what can I do?”
I’ve had a lot of conversations with landlords on behalf of tenants lately because tenants need rent relief. Let’s examine the things that your business can do to help slow the burn:
Your business has seen its receipts drop dramatically. Your monthly income just is not at the same level it was. You feel reasonably confident about the future but right now the priority is monthly cash flow. Whether you have Midtown office space or Downtown office space, deferral is a way to agree with the landlord that for some set period of time, you will either send no rent or a portion of your rent. It is crucial to remember this is not a rent forgiveness. You will agree that the amount of rent that was not paid in full will be paid back over an agreed time period, in some instances perhaps with interest.
Why would the landlord do this? You have shown proof of near-term hardship and the landlord is rooting for you. They do not want their space back; they would prefer to have a thriving tenant who pays their bills. If they can help in some way to help you maintain your tenancy and get back to better financial health, they are into it.
This is the opportunity to not pay any rent for a period of time. Consider it a “free-rent” period. As we know there are very few things that are free in life. In this case, the time that the rent was abated will be added on as an additional term at the end of the lease. For example, let us say you have two years left on your lease and you receive and abatement of three (3) months. Once those three (3) months are up, your lease will continue for two years. Effectively you have extended the life of your lease while enabling you to reduce your monthly cash burn in the short term. Again this a win-win for a landlord will a strong balance sheet because it enables them to help a tenant who may be struggling while also giving themselves a better chance of keeping a tenant and therefore their space occupied. It’s the business they are in after all.
Of course, it’s dependent on the market environment but if you believe your cash flow situation is temporary, there is an interesting opportunity to hire representation (what I do) and approach the landlord about doing an early renewal of your lease. You may ask, why would I want to do that? The answer is because, as you may be aware from reading my blogs on office leasing, you are eligible for lots of free stuff when you sign a new lease whether renewal or relocation. The free things like concessions include free rent and dollars to improve your space (that can also be converted into free rent if you ask for it).
As Rod Santomassimo once said, “everybody’s favorite radio station is “WIFM”- What’s In It For Me.” With that in mind, by helping the landlord have more visibility on their future rent roll and giving them a greater opportunity to refinance and take cash out from their investment, you can also help your own business by potentially applying that free rent period now. It will also potentially help you lower your average rental rate over time if you are able to achieve lower base rents on your extension.
Hopefully, this was a helpful explanation of a few different ways that you can help lessen the near-term bleed that you may be experiencing in your business at the moment. I, as a commercial real estate broker, am having success, speaking to landlords on behalf of tenants to find creative solutions to help what hopes to be a temporary challenging business environment. As always please feel free to contact me with any questions regarding your Manhattan office space.